Budget 2016, released on March 22, 2016, reiterated the Government of Canada's commitment to introducing a bail-in regime. With the tabling of Bill C-15, Budget Implementation Act, 2016, No. 1, on April 20, 2016, the arrival of a bail-in regime to Canada came one step closer to fruition. Bill C-15 includes amendments to the Canada Deposit Insurance Corporation Act ("CDIC Act"), the Bank Act and other related Acts that, if passed, will establish the framework for a bail-in regime for Canada's domestic systemically important banks ("D-SIBs").

Background

During the global financial crisis, a number of troubled financial institutions considered "too-big-to-fail" were bailed-out by government support (although notably this did not occur in Canada). These events gave rise to widespread concern about the cost to taxpayers and the moral hazard resulting from bail-outs. Bail-in regimes provide resolution authorities with the power to convert certain liabilities of a failing bank into equity, with the intention of recapitalizing the bank and ensuring creditors and shareholders bear the costs of restoring the bank to viability.

Bail-in was an element of the Financial Stability Board's Key Attributes of Effective Resolution Regimes for Financial Institutions, which were endorsed by the G-20 in November 2011. It was announced in Economic Action Plan 2013 that a bail-in regime would be introduced for Canada's systemically important banks. In August 2014, the Department of Finance launched the Taxpayer Protection and Bank Recapitalization Regime: Consultation Paper, which outlined the proposed design of the regime, and sought input on its key elements. In Economic Action Plan 2015 and, most recently, Budget 2016, the Government signalled its intention to introduce legislation to introduce the bail-in regime.

For additional background regarding bail-in, please refer to our December 2013 Bulletin Bail-in: Coming to Canada, and our August 2014 Bulletin Government Launches Consultation on Proposed Bail-in Regime.

Basic Framework

The proposed amendments to the CDIC Act will provide the Governor in Council, on the recommendation of the Minister of Finance, with the authority to make an order giving CDIC the power to convert, or require a member institution to convert, certain shares and liabilities of the member institution into common shares of that institution or any of its affiliates. An order respecting a conversion can only occur if an order vesting CDIC with the shares and subordinated debt of the member institution or an order appointing CDIC as receiver of the member institution has first been made.

Bill C-15 does not specify what shares and liabilities of the member institution may be subject to a conversion. Furthermore, no indication as to the magnitude of a conversion or the potential range for a conversion multiplier are provided. Rather, it appears that these questions will be addressed in regulations. This should come as no great surprise: Budget 2016 signalled the Government's intention to introduce "framework legislation" for the bail-in regime, and stated that "regulations and guidelines setting out further features of the regime will follow."[1]

Budget 2016 makes reference to the conversion of "eligible long-term debt" of a failing member institution, but the concept is not defined in Bill C-15. The Consultation Paper had proposed "senior unsecured debt that is tradable and transferable with an original term to maturity of over 400 days."[2] A key question is whether deposits will be included in the scope of a potential bail-in. Many will recall the concerns that were raised by stakeholders following the tabling of Economic Action Plan 2013, which only indicated that "certain bank liabilities" would be subject to conversion.[3] The Minister of Finance's office later clarified that deposits would be excluded from a bail-in, a fact that was reiterated in the Consultation Paper and Economic Action Plan 2015. Following the tabling of Bill C-15, Michele Bourque, President and CEO of CDIC, stated that "[b]ail-in would not change the deposit protection offered by CDIC."[4]

The Consultation Paper proposed a regime whereby the resolution authorities have the flexibility to determine, at the time of resolution, the portion of eligible liabilities to be converted into common shares. Bill C-15 provides CDIC with the power to convert, or cause the federal member institution to convert, in whole or in part - by means of a transaction or services of transactions and in one or more steps - the institution's shares and liabilities.

No mention is made in Bill C-15 of the potential range for the conversion multiplier. The Consultation Paper suggested that the multiplier could be between 1.1 to 2.0, while at the same time stating that this would be done by the resolution authority through regulation or guidance.[5] Furthermore, Bill C-15 does not address the relationship between bail-in and Non-Viability Contingent Capital ("NVCC"). The Consultation Paper proposed that a conversion could only be exercised following the full conversion of the member institution's NVCC instruments.

Bill C-15 provides the Governor in Council with the authority to make regulations respecting a conversion that applies in respect of shares and liabilities

  • that were issued or that originated before the day on which the first regulation made comes into force if, on or after that day, they are amended or, in the case of liabilities, their term is extended; or
  • that are issued or that originate on or after that day.

In addition, CDIC will be given the authority to make by-laws prescribing the interim instruments into which shares and liabilities may be converted before they are converted into common shares. It remains to be seen what interim instruments are envisioned.

Higher Loss Absorbency

In order for bail-in to be effective, the D-SIB must have sufficient loss absorbing capacity. To this end, Bill C-15 proposes amending the Bank Act to provide for the designation of D-SIBs by the Superintendent and to give the Superintendent the power to provide, for each D-SIB, the amount (consisting of capital and prescribed shares and liabilities) that constitute the bank's minimum capacity to absorb losses.

Bill C-15 provides the Governor in Council with the authority to make regulations, and the Superintendent the authority to issue guidelines, respecting the maintenance by D-SIBs of the minimum capacity to absorb losses. The Governor in Council will also have the authority to make regulations, and the Superintendent to make guidelines, respecting the disclosure by D-SIBs of information in relation to their capacity to absorb losses.

Compensation Scheme

Bill C-15 also provides for a compensation scheme whereby prescribed persons (to be identified in regulation) can receive compensation in the event of a bail-in. The compensation regime would provide compensation for persons who are worse off than they would have been in a liquidation. This is consistent with the FSB Key Attributes, which provide that "[c]reditors should have a right to compensation where they do not receive at a minimum what they would have received in a liquidation of the firm under the applicable insolvency regime..."[6] This standard for determining compensation would replace the existing compensation scheme under the CDIC Act. It would not be limited to resolutions involving bail-in. While compensation will be determined by CDIC in the first instance, an assessor, in prescribed circumstances, will be appointed to review the determination by the CDIC.

Other Changes to CDIC's Resolution Toolkit

Bill C-15 makes a number of other changes to CDIC's resolution toolkit. For example, an order vesting CDIC with the shares and subordinated debt of a member institution currently applies to all the shares and subordinated debt of the member. Bill C-15 will limit the application of the order to only the shares and subordinated debt specified in the order.

In addition, where an order vesting CDIC with the shares and subordinated debt of a member institution, or where an order appointing CDIC as receiver of the member institution has been made, the powers, rights and privileges of the member institution's shareholders to vote or give approvals would be suspended. In such cases, CDIC would be able to exercise these powers, rights and privileges.

Furthermore, in situations where CDIC has been appointed receiver of the member institution, CDIC would now have the authority to appoint or remove any director of the member institution.

Next Steps

Prior to becoming law, Bill C-15 will have to be passed by both the House of Commons and the Senate. This will include a detailed study by the House of Common's Standing Committee on Finance, the Senate's Standing Committee on National Finance and the Senate's Standing Committee on Banking, Trade and Commerce.[7] Typically, budget implementation bills tabled in the spring are passed by Parliament in June and receive Royal Assent shortly thereafter.

While Bill C-15 answers some of the questions relating to bail-in, uncertainty remains regarding the finer points of Canada's bail-in regime. It will be interesting to see how these will be addressed through regulation.